Posts Tagged: negative equity mortgage

We spoke about the up and down sides of coming out of negative equity 0n Today with Sean O’Rourke on RTE1 where Keelin Shanley was sitting in.

There are winners and losers in every economy, and many things in economic terms come with a series of trade offs. So to think that rising house prices are a good thing is only taking the view from one pre-determined set of assumptions, there are many losers when we create winners and that needs to be remembered. We are hopeful that those points were well made.

There is a lot written about negative equity mortgages, what nobody seems to cover is how they actually work or get underwritten so here is a primer on it, usual caveats apply, this isn’t set it stone, it’s the rules of thumb that will ensure your application is possible with the greatest number of banks.

Naturally the banks don’t release this information, they want it to be a ‘case by case’ product, but we have spotted the trend in terms of how they are assessed which inspired this post.

First the bad news, if you are in negative equity and want to move house you’ll need to have a deposit. Even though you might be ramping up to 175% LTV you can’t do this without a deposit on the 2nd property (that you’ll be moving into).

You’ll also need to ensure you don’t go outside of the maximum LTV allowable in the institution you are applying through.

EBS have announced a rate hike of 0.6% which is a follow on from their last 0.6% hike that was levied against variable rate mortgage holders on the 1st of May, this brings their margin increases to a total of 1.2% for the year to date.

Today’s Indo lead with this story (by Charlie Weston) and rightly pointed out that by the time this is over, a person with a €300,000 mortgage over 30 years could expect to pay just over €3,000 a year (after tax) in increased mortgage payments. For a person on the average industrial wage this is like a full months wages before tax being sucked away by the financial system. Tax hikes and wage cuts aside, this will ultimately reduce the money that is being spent in the economy and it will disappear into the financial system where banks will use it to de-lever further.

The contention for many people is that they are being punished, not for what they have done …

Legendary Behavioral Economist Dan Ariely presents a piece about trade off’s between instant gratification versus long term gratification, reward substitution, cheating, trust/revenge, global warming, executive pay and many other fascinating topics. This video is fascinating and for me is a real insight into the psychology behind economics that is so often over looked in classical economics. This is explained in simple terms that we can all understand and relate to, hope you enjoy!

There was a post on Geckko’s World about Negative Equity Loans – and he rightly pointed out that there had been an instant and widespread denouncement of them, then going on to point out that if a person was to try to reduce their debt that it could in fact be a very good concept. My opinion is that the focus will not be as a facility to reduce a persons debt but rather to increase, however, Geckko makes some very interesting and valid points which show that the first reaction was perhaps not totally balanced, as well as giving some smart operational guidelines (it’s worth leaving here for a while to check out the post).

However, there are some distinct advantages for the lender in this process as well which I have not seen any commentary on (if you have please post links in the comment section!).

I was interested in the front page of today’s Independent in which Charlie Weston broke a really big story about Irish banks being in advanced stages of designing ‘Negative Equity Mortgages’ (this is vastly different than the Negative Equity Loan/Short Sale Loan we have discussed previously). Essentially the bank will allow an individual to carry negative equity out of one property and move that onto another one within certain parameters.

This practice has already existed in the UK and is offered by Nationwide, Coventry and RBS, the schemes have not proved to be very popular, in part because of the stringent underwriting required. It is one thing for a client to fall into negative equity but another to actually facilitate them in compounding that fact and taking a further bet on their ability to repay. What do I mean by that?

First Loan: €200,000 Value: €150,000 Neg/Eq: €50,000

Then the €50,000 shortfall is passed into a second loan of (for example) €200,000 …

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